Retirement Portfolios

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indexaway
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Retirement Portfolios

Post by indexaway »

Hello!

I am helping my parents with their IRA accounts. Mom and dad basically hold their accounts totally separately and so I will treat each as a separate portfolio independent of the other (also nicely allows for a fun exercise to see how different allocation strategies play out in real life).

Each account will have ~450,000. In my own account, I have a more traditional Total US + Total International + Total Bond (with some small value tilt and REIT to round it up). For their accounts I wanted to try something a little different; here's what I'm thinking:

Account 1:
30% - Wellesley Income Fund Admiral Shares (for its conservative allocation and income orientation)
70% - divided up as: 60% total bond, 25-30% total US stock, and 10-15% international

Account 2:
70% - Target Retirement Income Fund
15% - Utility Fund ETF
15% - High Yield Bond Fund
(utility and high yield would add more volatility in hopes of greater yield/returns over the long term)

I could use any general reactions, as well as:

1) VTINX vs VWINX? - this has been covered before; despite similar stock/bond allocation, they're quite different in terms of degree of diversification, managed vs index approach, etc. My impression is that they both fulfill the same general purpose in a retirement portfolio as a core holding.

2) Why hold VTINX as opposed to its individual funds? It seems that the latter approach could help me lock in lower cost admiral shares, but of course would require more time in terms of interval rebalancing.

3) What are your thoughts about utility funds? I've read that they generally offer less volatility than most stocks (but more than bonds) and greater yield.

4) Any other suggestions for allocations? I've had no problem managing my own account of approximately 150,000. But managing my parents' account gives e greater pause because: 1) it's a lot more $$$; and 2) it's someone else's to loose. Fortunately they're pretty secure financially and can still make do comfortably without their IRA funds, giving me greater liberty to try different approaches.

I feel like the exact allocation doesn't matter too much as long as there is a written plan/allocation goal and a method to rebalance without emotional input. I think we can all agree that there is a golden portfolio that will give the best returns over the next 10 years, but no one knows what it is yet!

-- Indexaway
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David Jay
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Re: Retirement Portfolios

Post by David Jay »

Are these tax-advantaged accounts (IRA, etc) or taxable accounts? Recommendations would depend on that question

[edit] Okay, I see at the top very that these are IRAs
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
indexaway
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Re: Retirement Portfolios

Post by indexaway »

David Jay wrote:Are these tax-advantaged accounts (IRA, etc) or taxable accounts? Recommendations would depend on that question

[edit] Okay, I see at the top very that these are IRAs

Yes, everything is tax-advantaged.
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David Jay
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Re: Retirement Portfolios

Post by David Jay »

Why the "income" focus when you say that your parents don't need the income? Wouldn't you be better off with a conservative (40-60 or 30-70) 3 fund? Alternately a single-fund like LifeStrategy Conservative.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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indexaway
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Re: Retirement Portfolios

Post by indexaway »

David Jay wrote:Why the "income" focus when you say that your parents don't need the income? Wouldn't you be better off with a conservative (40-60 or 30-70) 3 fund? Alternately a single-fund like LifeStrategy Conservative.
That is a good point. I suppose I came across these as generally suggested for retirees and so naturally are focused on income. Still, the past results of VWINX rival other strategies with similarly conservative allocations. So it seems like a good bet regardless of the merits of an income focus. This comes with the caveat that past returns don't forecast future returns.

Indexaway
jjface
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Re: Retirement Portfolios

Post by jjface »

Seems like you are kind of 'playing' with their accounts rather than really following what you would do. Keep it simple which is going to be boring. You could do wellesley in one and lifestrategy conservative growth in the other if you really are on the fence between the two. Easy to manage. Messing with utility etfs and high yield bonds is ... well messing in my opinion!
Last edited by jjface on Fri Apr 08, 2016 11:05 pm, edited 2 times in total.
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Watty
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Re: Retirement Portfolios

Post by Watty »

You are making this way too complicated. :oops:

Since they are all retirement accounts then a low cost target date retirement fund would be more appropriate. Professional mutual fund managers rarely beat the indexes so it would not be realistic to think that you could.

In addition there are problems like;

1) What happens to their investments if you get hit by a Mack truck?

2) You could make good choices but it could still turn out badly and that could be awkward or worse.

3) Sometimes when people get older and less capable with their finances then they can be scared that people are trying to take advantage of them(which is often true). That could make doing things like routine reblancing touchy.
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indexaway
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Re: Retirement Portfolios

Post by indexaway »

jjface wrote:Seems like you are kind of 'playing' with their accounts rather than really following what you would do. Keep it simple which is going to be boring. You could do wellesley in one and lifestrategy conservative growth in the other if you really are on the fence between the two. Easy to manage. Messing with utility etfs and high yield bonds is ... well messing in my opinion!

Not a fan of the Target Retirement Income Fund? Also, why a lifestrategy fund vs its individual funds (minimize fees)? I share the same concerns re the utility and high yeild funds. I wanted to add a little salt and pepper, but don't feel strongly about this.

Thanks for your reply!
jjface
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Re: Retirement Portfolios

Post by jjface »

indexaway wrote:
jjface wrote:Seems like you are kind of 'playing' with their accounts rather than really following what you would do. Keep it simple which is going to be boring. You could do wellesley in one and lifestrategy conservative growth in the other if you really are on the fence between the two. Easy to manage. Messing with utility etfs and high yield bonds is ... well messing in my opinion!

Not a fan of the Target Retirement Income Fund? Also, why a lifestrategy fund vs its individual funds (minimize fees)? I share the same concerns re the utility and high yeild funds. I wanted to add a little salt and pepper, but don't feel strongly about this.

Thanks for your reply!
I like a little extra equity since your parents don't need to rely on these funds. So I didn't suggest the target retirement income fund which is 30:70. It is a nice fund though so perfectly fine. I'm also a big Wellesley fan so there is some bias there too.

I would suggest a lifestrategy fund vs individual funds for simplicity especially as your parents seem to have no real desire to manage them. If you get busy or something happens or whatever and they are left to handle it will they be comfortable with the individual funds? Maybe not - maybe so - you know them better than I do. I figured not.

I am a fan of simplicity but others are happier with slicing and dicing and mixing things up. Each to their own. Since this is for your parents I would personally lean towards simplicity in case they have to manage it themselves or want explanations.
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indexaway
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Re: Retirement Portfolios

Post by indexaway »

jjface, thanks again for your reply.

After some thought, the forum replies, and backtesting different allocations to see how volatile they'd been in the past, I am now considering the following:

Dad:
> 50% --Wellesley
> 50% -- Target retirement or Lifestrategy Conservative (backtesting showed that the former had nearly the same returns with less volatility)

Mom:
> 30% -- Total US Stock
> 10% -- Total international Stock
> 30% -- Total US bond
> 30% -- TIPS index fund
(all admiral shares)

Any new reactions?

Thanks!
Indexaway
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Watty
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Re: Retirement Portfolios

Post by Watty »

indexaway wrote:Any new reactions?
I still don't see what you are planning to gain by making them, especially your mom's, more complex than it needs to be.
highercall
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Re: Retirement Portfolios

Post by highercall »

What about Vanguard's Balanced Fund...can't get much simpler than that.
Topic Author
indexaway
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Re: Retirement Portfolios

Post by indexaway »

Watty wrote:
indexaway wrote:Any new reactions?
I still don't see what you are planning to gain by making them, especially your mom's, more complex than it needs to be.
If I were to be honest to myself, it just gives me something "to do" (to have to rebalance, etc.). Plus I am a little curious how owning individual index funds would do versus owning a fund of funds. Also for mom, I am also managing her taxable vanguard account, so by breaking it up into individual funds I can prioritize the more tax-efficient portion into that account. I suppose I could just opt for the balanced tax managed fund in that account instead. Not great reasons, I admit.
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Watty
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Re: Retirement Portfolios

Post by Watty »

indexaway wrote:If I were to be honest to myself, it just gives me something "to do" (to have to rebalance, etc.). Plus I am a little curious how owning individual index funds would do versus owning a fund of funds.
Reread your posts. You are basically going to experiment with almost a million dollars of your parents money just to give yourself something "to do"?

Hiring a financial planner has all sort of pitfalls but it might make sense for your parents to use a carefully selected low cost "fee only" financial planner that has a fiduciary responsibility to them to help them with their investments.
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indexaway
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Re: Retirement Portfolios

Post by indexaway »

Watty wrote:
indexaway wrote:If I were to be honest to myself, it just gives me something "to do" (to have to rebalance, etc.). Plus I am a little curious how owning individual index funds would do versus owning a fund of funds.
Reread your posts. You are basically going to experiment with almost a million dollars of your parents money just to give yourself something "to do"?

Hiring a financial planner has all sort of pitfalls but it might make sense for your parents to use a carefully selected low cost "fee only" financial planner that has a fiduciary responsibility to them to help them with their investments.

Your insinuation is that I am just playing around with my parent's funds without care or thought. To the contrary, I care very deeply about my partents' financial health and only took up this responsibility because they were previously duped by broker agents into making terribly expensive investments (senseless annuities, costly units trusts, and front-loaded expensive actively managed funds) such that they were paying nearly $20,000 yearly to get below-market returns. Taking money away from these brokers and consolidating them at Vanguard made sense to me. Then defining an appropriate asset allocation for their goals and risk tolerance, determining the proper number of low cost index funds, and with a plan to rebalance yearly is not playing around. I am 100% prepared to take full financial responsibility for their welfare if need be and I would provide for them without restraint should such an occasion arise, and would do so with a confident smile given all they've given me. I cannot imagine what financial advisor would feel greater responsibility towards them than myself. The reason I am asking questions on this forum is precisely so that I can use your collective experience to make the best decision for them. You seem to be very critical of the exact funds I've been thinking about, but backtesting the different portfolio options I've been considering shows very little difference in previous returns and volatility, which just shows that the asset allocation is more important than the fund allocation. After some thought, I've come to agree that high-yield bond funds and utility funds are unnecessary here and have dropped them from consideration; however, whether I choose balanced funds or a mix of individual index funds doesn't make much difference. When I said "something to do" I was referring to rebalancing, not anything else.

I do appreciate your advice, but I feel that you've misunderstood the situation and my intentions.
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GK4321
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Re: Retirement Portfolios

Post by GK4321 »

Many years ago, my parents approached me for advice about their retirement savings. I was a bit anxious about it, but also wanted to help them make a good decision. In the end, I helped them move all of their retirement assets into a VG Target retirement fund. As time has passed, the investments have all now automatically moved into the Target retirement Income fund.

Best decision we ever made. Vanguard does all the work. My folks are happy with the simplicity, and they're busy thinking about other things in retirement. I'm happy that they are happy. We have not had to make any rebalancing decisions, talk about the market, wonder if we should move assets around, etc.

FWIW, I'm very glad we decided not to have more than one fund in their accounts.
Last edited by GK4321 on Sun Apr 10, 2016 4:58 pm, edited 1 time in total.
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indexaway
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Re: Retirement Portfolios

Post by indexaway »

GK4321 wrote:FWIW, I'm very glad we decided not to have more than one fund in their accounts.
Thanks GK4321. I sympathize with your earlier anxiety. It is no menial undertaking. Limiting myself to 1 or 2 funds would make sense for them with the benefit of allowing them to better grasp their investments and giving them the ability to take care of it own their own should something happen to me. Will ponder on this; thanks again.

.indexaway.
ddunca1944
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Re: Retirement Portfolios

Post by ddunca1944 »

DH and I are retired. He doesn't want to be involved in the investment decision making, so it's on me. My goal is to keep it as simple as possible because if I die first, he won't make any changes. I wanted an AA of 50:50 (a little aggressive because our regular expenses are covered by SS & pensions). I have both accounts divided between Life Strategy Moderate and Wellesley. The Life Strategy gives us some international and I like the way the Wellesely managers have done. Low costs and simplicity. We've both been happy with that allocation through up markets and down.
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indexaway
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Re: Retirement Portfolios

Post by indexaway »

ddunca1944 wrote:DH and I are retired. He doesn't want to be involved in the investment decision making, so it's on me. My goal is to keep it as simple as possible because if I die first, he won't make any changes. I wanted an AA of 50:50 (a little aggressive because our regular expenses are covered by SS & pensions). I have both accounts divided between Life Strategy Moderate and Wellesley. The Life Strategy gives us some international and I like the way the Wellesely managers have done. Low costs and simplicity. We've both been happy with that allocation through up markets and down.
That's great to hear. I had already decided on 50-50 split between Wellesley and Lifestrategy Moderate for one of the accounts, and it's good to hear your experience with this. I think I will do Wellesley + Target Retirement for mom's account since she's very averse to downside fluctuation. I'll probably end up placing her taxable moneys into the Tax Managed Balanced Fund for alternate with VTSAX+VWITX for tax loss harvesting.

Thanks!
hoops777
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Re: Retirement Portfolios

Post by hoops777 »

Make everyone's life simple and invest the same in each account.Hard to beat the 50-50 with Wellesley and Life strategy.
K.I.S.S........so easy to say so difficult to do.
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Watty
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Re: Retirement Portfolios

Post by Watty »

indexaway wrote:I'll probably end up placing her taxable moneys into the Tax Managed Balanced Fund for alternate with VTSAX+VWITX for tax loss harvesting.
When you look at a persons asset allocation you need to look at all their accounts combined and then figure out where the most efficient place to hold each of the asset classes is. Typically people want to hold all their bonds in a retirement account for tax efficiency. That fund is over 50% bonds so you might want to reconsider that.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

When I raised the possibility of them using a low cost fee only financial planner I was thinking of something like the Vanguard planning services that charge 0.30% of the assets under management to help them for a year or two to get set up then they could stop using their services once their portfolio was in order.

I have not used them but you can search the forum for posts about them.

https://investor.vanguard.com/financial ... visor-fees

One of the challenges that they will have in their taxable accounts is that moving the money around to better holdings could have tax consequences so be sure to know the tax impact before you make changes in their taxable account.
Last edited by Watty on Sun Apr 10, 2016 10:53 pm, edited 1 time in total.
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BL
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Re: Retirement Portfolios

Post by BL »

hoops777 wrote:Make everyone's life simple and invest the same in each account.Hard to beat the 50-50 with Wellesley and Life strategy.
+ 1000

Don't make this an experiment, please! There is great value in simplicity and in having both come out about the same. Do you want your parents to think you are playing favorites when one does better than the other?

You didn't say much about the taxable but perhaps the tax managed balanced is not a bad idea. You also didn't tell ages or much else, except they don't immediately need it. Have you planned the RMDs?

If you want to experiment, do it in your own account, please. This is your Mom speaking. :twisted:
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indexaway
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Re: Retirement Portfolios

Post by indexaway »

BL wrote:You didn't say much about the taxable but perhaps the tax managed balanced is not a bad idea. You also didn't tell ages or much else, except they don't immediately need it. Have you planned the RMDs?
At age 65, mom is nearly retired but will probably continue working part-time with a salary drop from about $150,000 to about $80,000.
- I will manage ~$450,000 in the Vanguard IRA
- She also has about $170,000 in a money market earning 3%
- Another $65,000 in taxable account

At age 65, dad will probably slow down in about 5 years, currently making about $500,000 which includes a professional salary and rental property income. After "slowing down", he will probably continue earning about $200,000 indefinitely independent of their retirement funds.
- I will manage ~$450,000
- He also has another ~300,000K at a broker that will be managed separately

I myself will have a large jump in salary after 4 more years to a mid-6 figure range plus another low six-figure range for the wife. I include this in considering my parents' (and wife's parents') financial security later on should anything catastrophic happen to their income/savings. So you will see that managing their money is not at all different from managing my own money. Their $$$ is mine and my $$$ is theirs; it's just how my family thinks/operates.
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BL
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Re: Retirement Portfolios

Post by BL »

You are still leaving a lot of guessing for us here, so don't be so surprised by the responses. If they have more income forever than their expenses (not mentioned), then it probably doesn't matter much what you do as they will be ok. Otherwise it would matter a lot if they have a couple million or multiples of that where you are "playing" with your inheritance.

It looks like fund placement might be important; however since you are looking at only part of the portfolios that is harder to consider. Bonds in tax-advantaged as much as possible makes some sense. Total stock funds in taxable as much as possible makes sense. Simplicity and low cost make sense.

The Boglehead's Guide to Retirement might be a book you can all look at for ideas in general.

At age 70 they will have to do RMDs, around 4%/year. What will they do with the money? There is an option now to give this tax-free directly to charities for up to $100k/year if they are so inclined. Maybe a toss-up with deductions, but it does reduce AGI which might be important in taxes.


Do they have wills, trusts, etc., estate planning up to date?
Do they have long-term care insurance or are they self-insuring?
Do they have a good tax accountant?
No need to publicly answer.

It sounds like they are challenging you to show your best judgment. Have discussions to learn as much about their wishes as possible and then do your best. It sounds like you have it already figured out for your own investment, and this is your chance to be just as reliable for them. The 3-fund portfolio is the gold star of investing, and the mentioned balanced funds are not far off from that. I still would keep it simple for their old age.
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indexaway
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Re: Retirement Portfolios

Post by indexaway »

Thank you all folks.

To recap what I've learned:
1) Keep it simple.
2) No need to try different strategies.


My goals: keep them in the market with a reasonable allocation while minimizing the costs of doing so, with an emphasis on the "minimizing costs". Again, they were paying a whopping $20,000 per year, which is over $1600 per month, with their previous brokers. Not having to put up with that drag, it won't be hard to do better.

Here it is:
A) Tax-sheltered: 50% Wellesley + 50% LS Moderate
B) Taxable: VTMFX (tax-managed balanced fund)

Thank you again.

.indexaway.
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